Loser in an Apple deal for Beats? Big-box stores

Thomas Lee

Updated 6:24 pm, Saturday, May 10, 2014

NEW YORK, NY - MAY 09: Beats headphones are sold along side iPods in an Apple store on May 9, 2014 in New York City. Apple is rumored to be consideringing buying the headphone company for $3.2 billion. (Photo by Andrew Burton/Getty Images)
Photo: Andrew Burton, Getty Images

NEW YORK, NY - MAY 09: Beats headphones are sold along side iPods...

NEW YORK, NY - MAY 09: Beats headphones are sold in an Apple store on May 9, 2014 in New York City. Apple is rumored to be consideringing buying the headphone company for $3.2 billion. (Photo by Andrew Burton/Getty Images)
Photo: Andrew Burton, Getty Images

NEW YORK, NY - MAY 09: Beats headphones are sold in an Apple store...

NEW YORK, NY - MAY 09: Beats headphones are sold in an Apple store on May 9, 2014 in New York City. Apple is rumored to be consideringing buying the headphone company for $3.2 billion. (Photo by Andrew Burton/Getty Images)
Photo: Andrew Burton, Getty Images

NEW YORK, NY - MAY 09: Beats headphones are sold in an Apple store...

NEW YORK, NY - MAY 09: Beats headphones are sold along side iPods in an Apple store on May 9, 2014 in New York City. Apple is rumored to be consideringing buying the headphone company for $3.2 billion. (Photo by Andrew Burton/Getty Images)
Photo: Andrew Burton, Getty Images

NEW YORK, NY - MAY 09: Beats headphones are sold along side iPods...

NEW YORK, NY - MAY 09: Beats headphones are sold along side iPods in an Apple store on May 9, 2014 in New York City. Apple is rumored to be consideringing buying the headphone company for $3.2 billion. (Photo by Andrew Burton/Getty Images)
Photo: Andrew Burton, Getty Images

NEW YORK, NY - MAY 09: Beats headphones are sold along side iPods...

NEW YORK, NY - MAY 09: The Beats headphone store is seen on May 9, 2014 in to SoHo neighborhood of New York City. Apple is rumored to be consideringing buying the headphone company for $3.2 billion. (Photo by Andrew Burton/Getty Images)
Photo: Andrew Burton, Getty Images

NEW YORK, NY - MAY 09: The Beats headphone store is seen on May 9,...

NEW YORK, NY - MAY 09: Beats headphones are sold along side iPods in an Apple store on May 9, 2014 in New York City. Apple is rumored to be consideringing buying the headphone company for $3.2 billion. (Photo by Andrew Burton/Getty Images)
Photo: Andrew Burton, Getty Images

NEW YORK, NY - MAY 09: Beats headphones are sold along side iPods...

A shopper holds the Beats Electronics LLC Pro headphones, sold for $399.95, at the Beats by Dr. Dre pop-up store in New York, U.S., on April 13, 2012. HTC Corp., a Taoyuan, Taiwan-based maker of smartphones, last year paid $300 million for a 51 percent stake in Beats Electronics LLC, the maker of high-end audio gear founded by Dr. Dre and Interscope Geffen A&M Chairman Jimmy Iovine. Photographer: Michael Nagle/Bloomberg
A shopper holds the Beats Electronics LLC Pro headphones, sold for $399.95, at the Beats by Dr. Dre pop-up store in New York, U.S., on April 13, 2012. HTC Corp., a Taoyuan, Taiwan-based maker of smartphones, last year paid $300 million for a 51 percent stake in Beats Electronics LLC, the maker of high-end audio gear founded by Dr. Dre and Interscope Geffen A&M Chairman Jimmy Iovine. Photographer: Michael Nagle/Bloomberg
Photo: Michael Nagle, Bloomberg

A shopper holds the Beats Electronics LLC Pro headphones, sold for...

New swiveling Beats by Dr. Dre Pro/ DJ headphones and the new BeatBox designed by Ammunition.
Photo: Ammunition

New swiveling Beats by Dr. Dre Pro/ DJ headphones and the new...

LAS VEGAS, NV - JANUARY 09: Rapper Kendrick Lamar performs at a Beats by Dr. Dre CES after party at the Light Nightclub at the Mandalay Bay Resort and Casino on January 9, 2014 in Las Vegas, Nevada.
Photo: Ethan Miller, Getty Images

LAS VEGAS, NV - JANUARY 09: Rapper Kendrick Lamar performs at a...

Unveiled during the Seahawks-49ers game Dec. 8, this TV commercial (pictured) for Beats by Dre headphones features S.F. QB Colin Kaepernick being abused by a mob of people who are obviously supposed to be Seahawks fans. Not surprisingly, the ad didn't go over very well in Seattle.

Photo: Framegrab, YouTube

Unveiled during the Seahawks-49ers game Dec. 8, this TV commercial...

Apple Stores, like this one in San Francisco, have changed industry practices and forced big-box retailers to adapt.
Photo: Paul Chinn, The Chronicle

Apple Stores, like this one in San Francisco, have changed industry...

The late Steve Jobs, Apple's longtime leader, made a big retailing move years ago when his company launched Apple Stores.
Photo: Paul Sakuma, AP

(05-10) 11:17 PDT San Francisco -- Apple's rumored decision to buy Beats Electronics will likely make Dr. Dre, who co-founded the iconic headphone company with record executive Jimmy Iovine, a billionaire. But the deal will not endear the rap music mogul to consumer electronics retailers who were counting on Beats for some much-needed rhythm.

Best Buy and Target, two big-box chains that have struggled in recent years to inject excitement into the notoriously fickle electronics category, recently struck partnerships with Beats to create special product displays inside stores.

It seemed probable that Best Buy might even roll out a Beats store-within-a-store - a similar concept it had already developed with Samsung and Sony.

If the acquisition speculation proves true, that won't be so likely considering Apple is not only a top supplier to Best Buy and Target - but also a top retail rival. So expect Apple to command even more influence over its big-box competitors.

How times have changed. In the 1990s and early 2000s, Apple, like any other manufacturer, was forced to sell products in chains because of the size, clout and reach of such retailers.

But the late Steve Jobs, a notorious control freak, disliked the way those companies sold his products. Jobs, along with other vendors, resented how big boxes focused more on squeezing profits out of Apple than finding innovative strategies that put his products in consumers' hands.

"I remember going into a room with just me and a group of Target executives, including a senior vice president," said a former electronics sales executive who spoke on the condition of anonymity as to not affect business relationships. "They would say, 'Your price is a little too high,' and then send you out to a waiting room with seven other vendors, whom they told the exact same thing. It was great for Target, not so much for the vendors. Nobody liked it, but that's how the game was played."

So Jobs decided to change the game. With help of former Target executive Ron Johnson, he launched the Apple Store, which reinvented the shopping experience. Out went the checkout lines and employees who spent more time pestering shoppers to buy, buy, buy. In came the Genius Bar and that gorgeous shop architecture.

The Apple Store also proved to be the perfect place to launch the company's many must-have personal devices like the iPhone and iPad. Even though Best Buy sells more Apple merchandise than any other retailer in the world - including Apple - Best Buy receives none of the credit because of the iconic Apple Stores.

Now the big-box world wants to copy Apple and create "unique experiences" for shoppers. Best Buy redesigned some of its stores, including a Geek Squad Solutions Center that looks suspiciously like a Genius Bar. Best Buy is also making nice with vendors to create store-within-a-store concepts. Under such deals, Samsung and Microsoft provide money, exclusive merchandise and employees in exchange for real estate inside the big box.

As Apple stole the excitement away from electronics shops, Beats helped to bring some customers back - no small feat in the Internet age.

Founded in 2008, the Santa Monica company helped rejuvenate the category of premium headphones. Endorsed by celebrities like LeBron James, Colin Kaepernick, Justin Bieber and Lady Gaga, the headphones - some of which sell for as much as $300 - have a certain cool factor. The stylish devices, recognizable thanks to the large "B" logo over the ears, have become hugely popular, spawning a number of competitors in the once sleepy personal audio market.

Pushed by growth in the mobile device and tablet sector, sales of premium U.S. headphones surpassed $1 billion last year - an increase of 21 percent from 2012, according to market research firm the NPD Group. Overall, Beats nudged the broader stereo headphone market 11 percent to $2.3 billion in 2013.

The company, which reportedly generates about $400 million in annual sales, is looking to expand beyond headphones and into speakers and earphones. Beats also enjoys alliances with Hewlett-Packard and Chrysler to install Beats audio technology in laptops, mobile devices and cars.

Until now, this was all good news for Best Buy, the first major retailer to form partnerships with Beats. The company already enjoyed close ties to Dre and Iovine, the chairman of Interscope Geffen A&M Records. In 2009, Best Buy launched Club Beats, a special store section devoted to DJ equipment, at 300 stores across the country. At the time, Best Buy had hoped Club Beats would offer customers a natural complement to its musical instruments department.

But Beats could soon see much greater exposure at Apple Stores - a blow to traditional brick-and-mortars.

Imagine the day when Apple CEO Tim Cook takes the stage with recently hired audio pioneer and THX inventor Tomlinson Holman - and don't forget about Dre - to unveil an Apple/Beats device. If and when that happens, don't expect crowds to form outside Best Buy.